Milling & Baking News - September 14, 2004 - 23

F I N A N C I A L

R E S U L T S

Krispy Kreme moves would
strengthen tilt toward retail
WINSTON-SALEM, N.C. - Wholesale
distribution of donuts is de-emphasized in
a new strategy for Krispy Kreme Doughnuts, Inc., discussed in a recent conference
call with Scott Livengood, chairman, president and chief executive officer. While the
company continues to pursue and gain
new supermarket and superstore accounts
for its donuts (see related story, below),
new initiatives will target retail growth
in a way that lessens the percentage of
donuts to be sold off premise.
Details of the Krispy Kreme plans were
presented in an Aug. 26 call following
the release of second-quarter financial
results. As previously reported, Krispy
Kreme net income in the second quarter
ended Aug. 1 was $5,674,000, equal to 9c
per share on the common stock, down
56% from the second quarter last year
(see Milling & Baking News of Aug. 31,
Page 1). In laying out priorities for Krispy
Kreme, Mr. Livengood said the company
will seek to maximize each store's profitability and reach a larger base of customers with the company's signature "hot
doughnuts now" experience.
To those ends, the company will build

and test, several smaller scale stores.
"They are conceived to meet our financial objectives at less than half the sales
of our existing models," he said. "The
stores will have much smaller donut
making equipment, exclusively
for retail and fund-raising
sales, in a space that is approximately 2,000 square
feet, roughly half the size of
our current stores."
The company's current
retail store format includes
enough capacity to satisfy
the demand of walk-in and drivethrough retail customers while still supplying supermarkets and other channels
in the area surrounding the stores.
Mr. Livengood said the company is
targeting total cost of developing one of
the smaller stores to be half the cost of the
company's current factory stores. The first
of the smaller stores will open this month
in Greensboro, S.C. Five such stores are
planned for the next several months.
Explaining the thinking behind this
new design, Mr. Livengood revisited
Krispy Kreme corporate history, noting

Krispy Kreme reviews successes,
difficulties in supermarket effort
WINSTON-SALEM, N.C. - While scoring a number of major "wins" in terms
of new donut distribution in the second
quarter ended Aug. 1, Krispy Kreme
Doughnuts, Inc. also lost business with a
major customer in certain markets.
In addition to distribution in 115 additional
Wal-Mart stores and 40 Costcos, the company
noted several prominent supermarket and
convenience store chains around the country
now offering Krispy Kreme donuts.
Attracting more inquiry during an Aug. 26
conference call was the disclosure that a major supermarket chain that had been carrying
Krispy Kreme donuts had opted to drop the
branded product in two of its markets, replacing Krispy Kreme with a store brand.
Responding to a request from a securities
analyst for elaboration on the lost business,
Scott Livengood, chairman, president and
chief executive officer, offered considerable
detail about why he believes Krispy Kreme
has achieved such rapid penetration into
supermarkets and about challenges facing
the company and supermarket chains in
ensuring that Krispy Kreme supermarket
programs succeed.
"About six years ago, supermarkets had

24 / Milling & Baking News, September 14, 2004

come out of an environment in which they
were making their own bakery products,
including donuts," Mr. Livengood said.
"It's a very difficult process, and it is very
expensive for a grocery store, especially
when you are doing a low volume. You
end up having a lot of waste, shortening
that goes bad because there is not enough
throughput.
"So when we came with an alternative,
and it was a branded program, there was
a tremendous amount of enthusiasm. We
have rolled it out in most major supermarket chains in the markets we are in.
"Some of the dynamics in our program
are that we are only making a delivery
once a day. I'm putting you in the mind
of the bakery buyer. If that person doesn't
fully appreciate and understand that we
are only making one delivery a day and
can only accept so much shrink, unsold
product at the end of the day, some times
there is frustration about the case looking
empty. So we really need a partner in the
store to reset the display, front the product
and clean it up to make it look as fresh and
full as possible. It's a challenge. There is
a tension between looking full and incur-

that wholesale markets were the primary
target for Krispy Kreme donuts through
much of the company's history.
In the 1990s, the company shifted to a
model focused on retail only.
"It failed for three reasons," he said.
"The size of the equipment and our low
volume equipment manufacturing scale
resulted in a high cost per unit. The size
itself drove additional building
square footage requirements,
which added even more cost.
Then third, our product
pricing couldn't convert our
customer accounts into acceptable sales."
In the company's current
model, which is retail oriented, the company's brand-defining stores use "wholesale execution to
fill the capacity, which greatly exceeds
the requirements for retail alone," Mr.
Livengood said.
While this approach has allowed the
company to expand geographically, there
have been constraints. Stores may only
be built in areas in which there is enough
surrounding population to support
wholesale business, Mr. Livengood said.
To improve penetration, the company
has explored a range of small scale satellite concepts, including kiosks, fresh

ring too much cost with unsold product.
"The case I believe here is that this particular bakery buyer, and I think this is correct, (has replaced our product) with prefried frozen donuts they can buy and stock
in the freezer. Then, if the stock is getting
depleted, they can just pull from the freezer, thaw the donut and put it out in the case.
Certainly, these are inexpensive. These are
donuts made in bulk, shipped in bulk and
put in a freezer. There are probably several
transfer points. You can imagine what they
taste like, but they're inexpensive. If they're
looking at what can they charge to get a
certain gross margin (this is the alternative
that was selected)."
Asked whether this change was
prompted by new technology, Mr. Livengood said it was not. "It isn't a new technology," he said. "It's as simple as putting
something in a freezer. It's not like they
have some way to bring it back like we've
done with our hot machine. That's a fresh
donut that has not been frozen. I hope it is
not a trend. We've had this happen before,
and we've also had people come back to
us after they've left."
Mr. Livengood expressed the hope that
they will be able to regain the supermarket's business. "We'd love to talk with
them if that program doesn't work to their
satisfaction," he said. MBN

bakingbusiness.com / world-grain.com

http://www.bakingbusiness.com http://www.world-grain.com

Milling & Baking News - September 14, 2004

Table of Contents for the Digital Edition of Milling & Baking News - September 14, 2004